In the ever-escalating tech tug-of-war between China and the United States, the dragon nation is unleashing a full-scale mobilization to propel its technological prowess forward. The gloves are off as the U.S. and its partners continue to throw up roadblocks, ushering in an era of deglobalization, at least on the political front.
China’s bold move comes on the heels of an extended period during which the central government has significantly tightened its grip on technology-related sectors. However, this clampdown has come at a cost – a hit to the rights and securities of investors in Chinese equities, now among the world’s worst performers.
The chip conundrum is at the forefront of this global tech showdown. With the artificial intelligence boom just kicking off, China finds itself without access to cutting-edge chips from heavyweights like ASML and Nvidia. The semiconductor industry stands out as a glaring example of how the battle over intellectual property is driving deglobalization, with similar struggles unfolding in energy, raw materials, and beyond.
Chips
The repercussions are felt on both sides of the Pacific. ASML anticipates a 10 to 15 percent dip in Chinese demand for lithographic systems due to export restrictions. Meanwhile, Apple’s staggering 24 percent drop in iPhone sales in China during the first six weeks of 2024 underscores the high stakes involved. In 2023, Apple raked in 20 percent of its sales from «Greater China.»
Even European heavyweights are not immune, with companies like BMW and Mercedes relying heavily on Chinese markets for 33 percent and 37 percent of their sales, respectively. For Rio Tinto, it’s more than half.
In a bid to bridge the technological gap, Beijing is pumping up R&D spending by 10 percent by 2024. However, the price of progress in a deglobalised landscape is higher prices. Companies like ASML, Apple, and BMW are left grappling with strategies to navigate the pressure on their sales from China.
Price pressure
Zooming out to the macro level, the fracturing of global supply chains into localized ones, spurred by political interventions or otherwise, is poised to drive up prices. These chains, now less efficient, may also spark trade wars, exemplified by pre-announced 60 percent import tariffs on Chinese goods.
Coupled with central banks abandoning the 2 percent inflation target, deglobalisation emerges as a catalyst for higher inflation over the long haul – a departure from the past two decades. With a 3 percent inflation scenario, central banks face a slightly more manageable landscape. The writing on the wall is clear: it’s time to adjust your portfolio accordingly.
Jeroen Blokland, founder and manager of the Blokland Smart Multi-Asset Fund and True Insights, shares his insights every Monday on Investment Officer Luxembourg.